Your dream has become a reality. The cause that is your passion has been transformed into a functional organization. You’ve established a board, clarified your mission, adopted bylaws, incorporated, and achieved 501(c)(3) status from the Internal Revenue Service. After such exhaustive effort has been expended, it would be senseless to allow the organization to lose its exempt status or even become administratively dissolved for failure to uphold administrative compliance. Thus, knowledge is power, organizational administrators must be diligent in educating themselves on all state and federal regulations.
First and foremost, it is important to recognize that almost all forms of regulatory compliance will be difficult without the maintenance of adequate financial records. It is imperative that administrators document all sources of receipts and expenditures. A sufficient donor database is ideal. It is also critical to retain all supporting documents, such as grant applications and awards, sales slips, paid bills, deposit slips, and cancelled checks. This will allow for easy preparation of financial statements, include statements of activities (income statement) and statements of financial position (balance sheet).
A 501(c)(3) organization’s annually mandated filing with the IRS is the form 990. All organizations are now required to file, regardless of revenue; however the version of the form will differ based upon the year’s receipts. The filing is due on the 15th day of the 5th month after the fiscal year end (For example, if the fiscal year ends December 31, the 990 is due on May 15th), but it may be submitted anytime after the fiscal year end. To remain in full compliance, administrators must be aware of all forms that must be filed, i.e. the 990-T for unrelated business income, and special filing requirements for supporting organizations.
In addition to annual reporting, organizations with paid employees will be faced with additional quarterly filings. Like all employers, charities who pay wages must withhold, deposit, and pay employment taxes, including federal income tax, Social Security, and Medicare. This must be done for each individual paid more than $100 per year and reported on form 941.
On top of the IRS compliance some states, though not all, will require annual state level tax filings. Upon commencement of the activities, you’ll need to be sure to obtain state level sales and income tax exemptions, if they are available in your state. If the organization is not granted state exemption, they must file and pay taxes! In some states, even organizations exempt from state taxes must still file some sort of annual return.
Accompanying the state tax considerations, each year the organization must file an annual report with their state to remain an active corporation. While these forms typically require a minimal amount of information, failure to file may lead to an administrative dissolution of the organization.
A final state level compliance issue to remain abreast of is concerned with charitable solicitation registration requirements. Such laws have been implemented in most states in an effort to protect consumers, and the statutes require charitable organization to register and become licensed prior to the initiation of any solicitation activities. These registrations typically require annual renewal, and come with stiff penalties for violations. If an organization will solicit in more than one state, a valid registration must be in place in each state where representatives will seek donations.
Possibly most importantly, you must remain aware of what activities may jeopardize your exempt status. The most common offenses that lead to the revocation of a 501(c)(3) are private inurement and political campaign intervention. Private inurement occurs when an insider receives excess benefit from the existence of the organization, either in the form of direct financial gain or in more indirect means such as the provision of business to a for-profit in which an insider has an ownership interest. Excess benefit may also occur in transactions with outsiders, however the benefit in the situation must be substantial. Lobbying activities, or attempts to influence legislation, may be conducted; however these activities must be kept to a minimum.
501(c)(3) nonprofits are also strictly prohibited from undertaking any political campaign intervention. While organizations may provide voter education or a review of the issues supported by all candidates, a public charity may not, directly or indirectly, support or oppose any candidate for political office.
Finally, organizations must be diligent in filing annual returns on a timely basis each year. Not only can the IRS revoke the exempt status of any organization that fails to file returns for more than two years, it also reserves the right to impose penalties upon late filers. While an organization may not owe any taxes, the standard penalty for late filing of the annual information return is $20 per day, up to a maximum of $10,000.
Remaining in compliance after attainment of 501(c)(3) status may seem a daunting task; however with careful attention and cooperation of organizational administrators public charities can function successfully and fulfill their missions abundantly.